“Resale inventory is at the lowest level in more than 18 years and continues to decrease. New home construction hasn’t kept pace with demand, and the result is an inventory shortage at a time when demographic and economic indicators are moving upward for the housing market.” – Molly Boesel, CoreLogic
TOP STORY: To Rent or to Buy: Consider the Options
Living is easy in the summertime, according to the famous George Gershwin song. Finding the right place to live, however, can be a good deal harder.
Like other important life decisions, choices abound: Should you rent an apartment or buy a home? And if you buy, what kind of property should it be? A condo in a high-rise building, or a single-family home in the ‘burbs? Perhaps you are thinking about living in a Home- owners Association to enjoy the advantages of life in an orderly environment that protects your property values.
If you are an older home buyer and approaching retirement, you may also be considering a home in a Senior Community. This way of life offers many advantages, such as public transportation, golf and frequent social events. These communities have some limitations, too. Your children or grandchildren may not be able to live in the house next door, even if you own it.
Daydream vs. Reality
People may daydream about their dream home, such as a hunting lodge in Montana, perhaps, or a penthouse in Chicago with downtown views. While those dreams may come true, the here-and-now issue is to find a place to live you can both afford and maintain.
Housing choices come down to your income and your budget. Other considerations may include your need to shelter your income or plans to get married and raise children. Every person’s situation is different, and everyone could probably use some advice from a qualified real estate professional.
The first big decision is to rent or to buy. The answer is more often a reflection of your finances and not just a matter of your personal preferences. Yet buying can make sense to many renters.
According to a report from a real estate website, in fact, buying was 38% cheaper than renting nationwide. When you zoom in on individual metro areas, however, you’ll find that percentage varies enormously, from 66% in Detroit to just 5% cheaper in Honolulu.
You can do the math yourself, with local market numbers, using rent vs. buy calculators. These are available from multiple sources, including realtor.com and the New York Times.
One economist warns, however, that, simply comparing the monthly rent to the monthly mortgage amount does not give an accurate picture of the comparative costs of owning vs. renting. You must add additional costs to home ownership, including taxes and utility costs. (Owning has tax advantages, of course, that offset mortgages costs.); if you choose to live in a Homeowners Association (HOA), you’ll need to add the monthly association fees to your payment.
Before Deciding to Buy
Here are some questions to ask yourself when determining whether buying or renting is best for you, courtesy of US News & World Report:
The first question is: How long do you expect to be in the home? “The longer you plan to stay, the better off you are buying,” says writer Teresa Mears. “That’s because buying and selling cost money —and require a significant amount of time and effort.”
“If you plan to stay less than five years,” she advises, “you might want to rent instead.”
The housing market has been shown to be profitable over time and among the safer investments. As with any investment, however, prices can fluctuate in the short term. Even if you buy your place as an investment, you should be content to live there in the event of a recession or a down-turn in market conditions.
The next question is: How stable are your job and your life? “If you’re in a declining industry and your job is not secure, you may not want to lock yourself into a mortgage or a (particular) city,” writes Mears. “If you’re involved in a romance with an out-of-town love, or considering relocation for other reasons, you may want to rent.”
Do you have savings for a down payment? While it’s possible to buy a house with as little as 3% down (or even 0% down if you qualify for a VA loan), in certain loan programs – assuming you qualify – you may put yourself in a more competitive position with a higher down payment; this is especially true when a seller has multiple bidders to choose from.
Your Best Use of Discretionary Cash
Another question: Do you have savings to pay for repairs? “All homes, even new homes, sometimes need repairs. Water heaters break, pipes leak and termites periodically drop by to wreak havoc on your home,” says Mears.
Also, would you be better off financially if you spent the money elsewhere? In some cases, “you might be better off financially renting and using your discretionary cash for investments. Consider the alternatives and do some math to determine which route is best for you.” At the same time, rental housing is increasingly expensive and high rents can make it difficult for you to “sock away” extra cash.
If your answers to these questions suggest home ownership is right for you, congratulations. Now it’s time for some financial homework and other considerations. US News tells the story of one young couple, Corey and Jessica. Both are 27, have graduate degrees and have jobs in their chosen fields.
Corey says he’s “always wanted to buy a house.” As the publisher of a personal finance blog for young people, however, he knew the question of renting vs. buying was not a simple one.
“I feel like I read all the time about the hidden costs of buying a house,” he tells US News. “There are a lot of unknowns.”
As a “personal finance nerd,” Corey did some pencil work and made a pleasant discovery: For the same price that the couple were paying to rent a one-bed- room condo, Corey and Jessica could afford to buy a three-bedroom condo in Boston. The purchase would require a substantial down payment. Happily, the couple had adequate savings.
Corey and Jessica say they plan to live in their new home for five years, at least. And as young people at the start of their careers, the pair have a good prospect for income growth, so housing costs will take less of a “bite” as their earnings increase.
HOMES SELLING AT NEAR RECORD PACE
If a “for sale” sign goes up in your neighborhood, don’t blink, you might miss it. The average home sold in May sold in just 34 days. May’s number broke the previous month’s record of 36 days. Homes are selling so quickly because there are so few for sale. More new listings did come on the market in May-4.3%-than in May 2017. While that helped to increase the number of sales, it did not help the overall supply situation much because demand remains so strong
Special Loan Assistance for Buyers
In the above anecdote, the young buyers had the resources to make a sizeable down payment. For prospective buyers who lack such savings, several government programs exist to assist buyers.
Veterans may qualify for a VA loan, while residents of some rural areas may be eligible for a USDA loan. Both these loan types require no down payment and offer fixed monthly mortgages payments. The Native American Veteran Direct Loan program enables Native American vets and their spouses to buy homes on federal trust lands. Again, these loans require no down payment, and, in this case, no mortgage insurance payments, either.
The Federal Housing Administration (FHA) loans offer down payments as low as 3.5%, and sometimes higher, depending on credit and other factors. One type of FHA loan is the Section 203(k) rehabilitation program, which provides money beyond the purchase price, so that a buyer can rehab a “fixer upper.”
Those federally chartered agencies known as Freddie Mac and Fannie Mae can provide loans requiring only a 3% down payment, to qualifying buyers.
Even more generous terms are available through the Good Neighbor Next Door program, which provides a 50% discount on the listed price of a home in regions known as “revitalization centers.” Available through the US Dept, of Housing and Urban Development, these loans are for police officers, teachers, firefighters and emergency technicians.
Other homebuyer-assistance programs, too numerous to list here, are available on the state and local levels. They are well worth investigating. Since program details can be complex, be sure to check with your mortgage advisor.
RENTAL DEMAND HIGH
More people rent than buy today and the rental housing investment market is hot. That’s more due to high home prices and a lack of single detached homes available. Many buyers don’t consider an apartment or condo a solid long term investment and will hold off buying until a low-rise type of property is available…. The rental property phenomenon is strong because investors are buying properties to rent out. Investors get the income earnings benefit, capital gains later, along with tax benefits. That’s dried up housing availability and raised prices. – GordCollins.com
Condo vs. Single-Family Detached Home
First-time buyers may find that their finances indicate that a condo would be an appropriate first choice for home ownership, because condos are typically less expensive than single-family homes.
Like all other property types, of course, condos have their advantages and disadvantages. Steve Gillman, a freelance writer and his wife, Ana, owned seven houses and two condos in a 15-year span. He says there are “pros and cons” to both types of housing.
On the pro side, condos often cost less, according to Gillman who paid $55,000 for a 685-square-foot, one-bedroom place in Tucson, Arizona. “There’s no way we could have bought a comparable house for that price,” he says.
Condos are low maintenance, because you are not individually responsible for the building’s exterior and its overall structural condition. Also, condos often have lower monthly expenses than single-family homes. That includes lower insurance costs. “The insurance you do have to buy covers only from the interior walls inward (including contents), so it’s much cheaper than a typical home- owner policy.”
Urban locations are another advantage to condos. By living in or near a city center, shopping and entertainment venues are often close enough not to require a car.
Within walking distance of his Tucson home, “we have numerous parks, three grocery stores, our bank, 20 restaurants, a hardware store, shoe store, discount clothing store and much more,” says Gillman, adding that he and his wife “never could have afforded a house so close to so much….”
On the minus side, condos often have less storage space than single-family homes. And as with any multi-family complex, there is more noise and less privacy than a stand-alone dwelling on your own land.
Affordability is a key factor in deciding your ultimate retirement destination. After all, you need to make sure your living costs don’t put too big a strain on your fixed income. Indeed, 67% of people say they’d move to a less expensive location to have a more financially comfortable retirement, according to a survey by Merrill Lynch and Age Wave, a research firm focused on the aging population…. Of course, being cheap is sometimes just as bad as it sounds, and affordable living costs don’t always guarantee a friendly financial environment.
Life in a Homeowners Association
Most condo complexes are operated by Homeowners Associations (HOAs). Single-family neighborhoods, particularly in suburban areas, are also managed by HOAs. In California, nearly a quarter of all homes are governed by these elected boards of your neighbors and fellow property owners.
The good part about HOAs is that they maintain a uniform level of property maintenance. In addition to common areas like swimming pools, HOAs often impose stringent controls on individual homes. These controls may include the way you park your cars, the color you may paint your home and the kinds of changes allowed on the exterior of your home.
HOAs Can Impose Special Fees
HOAs also assess monthly fees to maintain common areas. If a big-ticket maintenance job comes up, the board may tack on additional fees, often hundreds and occasionally thousands of dollars annually to pay for them. Individual owners often have very limited recourse to fighting these assessments.
Given the many rules and occasional unexpected fees an HOA may impose, it’s not surprising that some independent- minded people take HOAs to court. Sometimes plaintiffs win, but not always; HOAs have carefully written contracts that buyers typically sign at purchase time, and HOAs often prevail in legal matters.
Many senior communities, which are often reserved for people aged 55 onward, are also operated by HOAs. The quality of HOA boards is especially important in such communities, because board members control many factors important to older people such as security, activities, and landscaping.
Are you currently renting and thinking about owning your own home? Call us.